Next: 'Boom years are over for retailers'

BBC business editor Robert Peston on consumer spending

Next has today said the boom years for retailers are over for the foreseeable future.

Because of the impact of public spending cuts and a diminution in the amount that consumers are borrowing to finance their lifestyles, the leading fashion retailer says that it expects very little growth in total consumer spending for many years - and "the new normal" will be low growth in underlying sales.

The remarks by Next will be noticed, partly because it is a respected business and partly because Next's chief executive is a Tory peer and close to the prime minister and chancellor.

The company is hopeful that the UK will avoid what it calls a meltdown in consumer spending or a double dip back into recession. But it concedes that public spending cuts will be enough to subdue any potential growth in consumer spending.

So it expects that its own revenue growth will be in the region of 2 to 5% over the long term, a fraction of the kind of increases that Next and other retailers enjoyed in the boom years up to 2007.

Next also warns that a shortage of manufacturing capacity and a rise in the price of cotton will push up the price of its clothes next year between 5 and 8%.

The sober assessment was made in half year results, which showed that Next's profits rose 15% to £213m in the six months to the end of July.

Update 0932: Next's "scenario" for sales growth over the next three to five years is that group revenues will increase at between 2 and 5% per annum.

Those turnover increments do represent a step change, in a downward direction: during the boom consumer spending years of 2002-2007, Next's revenues increased at an annual rate of just under 12%.

A big dip.

But where will Next find any growth in these straitened times? Well Lord Wolfson says most of it will come from "the acquisition of new retail space" and continued progress of Next Directory, the catalogue arm.

Or to put it another way, sales in existing shops are not expected to grow. Its future success depends on it being able to relentlessly take business from weaker competitors.

Even so, Lord Wolfson believes he can still make a healthy return for his shareholders. He believes operating profit can rise by up to 7% a year, through "careful management of costs and continued innovation in our operations".

But here I suppose is the financial proof that the outlook for retailers like Next is fairly grim: Next plans to buy from its shareholders about 4 to 5% of its issued shares every year, because that should deliver a better return for the owners than if the cash was invested in expanding the business.

Update 0944: In case anyone thinks I am losing my marbles, there's no surprise that Next believes consumer spending will be subdued for some time.

The combination of a public spending squeeze and the "deleveraging" of British households - who borrowed more than 170% of their disposable income at the peak and now recognise that there's some virtue in saving rather than spending - has made it obvious for months that the party on the high street is over.

As readers of my blog will know, prospects for consumer-facing businesses changed for the worse in a fundamental way at least as long ago as 2007 - when the credit crunch highlighted how the debts of households had increased to levels that were not sustainable.

If the Bank of England hadn't taken unprecedented steps to force down interest rates, consumer spending would have utterly collapsed, rather than stagnating.

All that said, what is interesting and highly significant is that Next has publicly put a time horizon of at least three to five years for this period of lower retail growth - and is adjusting its business strategy on that basis.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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